When you’re a renter, you may have a lot of other financial goals you hope to meet in the future. A big chunk of your income might be going toward rent and related housing expenses, so you have to be especially careful about your budget and how much you’re paying in rent.
As you’re budgeting for the amount of rent you can afford each month, you also have to think about other expenses that are going to come along with your housing. For example, you have to consider security deposits if you’re looking for a new place. You also have to think about things like renters insurance. Renters insurance in New Jersey might be slightly more expensive than in a southern or western state, but overall the costs for this coverage are similar and can save you from a financial disaster.
Renters’ insurance is around $15 a month on average and can help protect you from property crimes, fires, and severe weather events, as well as coverage from liability lawsuits and displacement.
With that in mind, the following are some specific considerations when you’re budgeting for how much rent you can afford to pay every month.
Should You Follow the 30% Rule?
Some experts will give the advice when you’re budgeting for rent that you follow the 30% rule. If you haven’t heard of it, it’s fairly simple—you should budget a minimum of 30% of your gross monthly income for housing costs. That’s your income before taxes.
If you’ve ever used a rent calculator online, there’s a good chance it uses the 30% rule as a default to help you figure out what you can afford.
If you apply for a mortgage, it’s even used as a qualification ratio to decide whether to approve you for a loan, and private landlords will usually require that a tenant’s yearly salary be at least three times the monthly rent.
While it can be a starting point, you shouldn’t necessarily assume the 30% rule is right for you.
First, the 30% rule is outdated. It goes back to public housing regulations from the 1960s, which capped rent for public housing at 25% of the tenant’s annual income. By the 1980s, it went up to 30%. The reason the government chose these percentages was that it’s what consumers were spending.
Averages don’t, however, take into the variations in our lives as individuals, and our financial obligations and balance sheets as consumers are a lot different from the 1960s. For example, in the 1960s, people didn’t have large amounts of student loan debt or contribute to their 401(k) plans as we do now.
The 30% rule doesn’t take into account your full financial picture, whether you’re a low or high-earner.
Not every renter is the same, and not every person is going to have the same budgeting and spending priorities.
Create a Budget Instead
While you can use the 30% rule as perhaps one consideration, it’s a better idea to create a budget that’s specific to you and your needs.
You can start by looking at all your expenses closely.
You can use an app to track your expenses automatically, or you can do it manually. You need to use something that’s going to allow you to integrate all of your financial data. This includes credit card purchases, automated and recurring payments, cash and check purchases, debt card purchases, automated fees you’re charged, and money coming in or going out through cash transfer services like Venmo.
Then, you can start to figure out your average monthly spending.
Where you live is going to impact your personal expenses quite a bit.
Now once you have your expenses and spending mapped out, look at what’s left for you to pay for rent.
If you have, let’s say, a monthly take-home pay of $4,000 and you have $2,500 in expenses, you would then have $1,500 left over. Then, think about what you’re putting towards meeting your savings goals, such as saving for retirement.
Maybe once you’ve factored that in, you have $1,100 that can go toward your housing expenses which should include not only your rent, as mentioned but also things like renters’ insurance and utilities. You might also need to factor in moving expenses along with a security deposit, like pet fees, furniture costs, or broker’s fees.
If you come to a number that doesn’t seem realistic for where you live, then you’re going to have to look to other places in your budget where you can cut your expenses.
The Emergency Fund Approach
Another way you can think about how much rent you can afford is to use your emergency fund as your guide.
Look at your cash flow, and then calculate if, based on your current financial situation, you’d have enough money saved to cover three to six months of rent and your debt obligations if you lost your income.
The 50/30/20 Approach to Budgeting
Yet another way to look at what you can spend on rent is the monthly budget guideline that’s 50/30/20.
You calculate your net income, and from there, go ahead and earmark 50% of your take-home pay for your rent, but also other essentials, including insurance, groceries, utilities, and transportation. These are fixed costs that are usually around the same every month.
Then, you can put 30% of your take-home pay toward your non-essentials like eating out.
You can use 20% of your monthly income for your savings and make additional debt payments. Your minimum payments for your debt should be included in your 50% calculation because you can’t avoid these.
There are things you can do to keep your apartment costs down somewhat. For example, moving away from the city center can help quite a bit, as can choosing a studio rather than a one-or two-bedroom apartment.
Finally, living with roommates can be one of the best options if you want to save money because you’re not only sharing rent and potentially able to afford a nicer apartment, but you can split other living expenses too, like your renters’ insurance and utilities.